Fitch Ratings yesterday affirmed Bank of Cyprus’s (BoC) long-term issuer default rating (IDR) at A- (A minus), short-term IDR at F2, individual rating at C, support rating at 2 and support rating floor at BBB. The outlook for the long-term IDR is stable. «The bank’s IDRs and its individual rating reflect BOC’s continuing good profitability and efficiency, satisfactory capitalization, limited market risk and improvements in asset quality,» said Andrea Jaehne from Fitch’s Financial Institutions Team in London. The ratings also take into account BoC’s strong franchise and importance to the domestic economy. Given its key position within the Cypriot economy and financial system, Fitch believes there is a high probability that support from the Cypriot financial authorities would be forthcoming, if ever required. Upward pressure on the bank’s ratings could arise, if BoC successfully manages its expansion strategy, continues to improve its asset quality and maintains its strong profitability and sound capitalization. Downward pressure could occur should fast loan growth and/or integration risks of the acquired Eastern European entities endanger the bank’s profitability, asset quality or capital. In the first nine-month period ended September 30, 2007, (Q307) BoC continued to perform well with net income growth of 69 percent, driven by strong loan growth, increased cross-selling activities, larger FX income and gains on the revaluation of financial instruments. As more than two-thirds of BoC’s operating income accounts for net interest revenue, the bank is vulnerable to narrowing interest spreads in light of fierce competition in Cyprus and Greece. Although BoC’s operating expenses increased 14 percent following the bank’s expansion, overall efficiency improved as its cost/income ratio decreased to 42.5 percent in Q307 (end-2006: 47.2 percent). In 2007, the bank has enhanced its asset quality, benefiting from stronger risk management processes. As a result, the group’s impaired loan stock further decreased, taking the impaired loan/gross loan ratio to 4.2 percent at end-September 2007 from 5.6 percent at end-2006. The quality of BoC’s strong loan growth in Q307 remains to be observed over the next years. BoC is mainly funded by customer deposits, which exceed customer loans. However, about one-third of customer deposits were FX deposits. Despite the short notice periods, these deposits have historically remained stable. Regulations require BoC to invest 75 percent of these deposits in highly rated and liquid government or bank bonds, resulting in sound liquidity. At end-June 2007 BoC was satisfactorily capitalized. Its eligible capital ratio stood at 12.4 percent. The bank’s capital was supported by a small amount of hybrids, accounting for 8 percent of the group’s eligible capital. In December 2007, BoC announced the redemption of CYP 65 million capital issued, which it will replace with a CYP 74 million hybrid issue in early 2008. BoC had the largest market share of loans and deposits in Cyprus and was the sixth-largest bank in Greece by total assets at end-2006.